SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 3765 words

COMMITTEE: SENATE FINANCE

HEADLINE: NATIONAL ENERGY POLICY

TESTIMONY-BY: MR. MARK HALL, VICE PRESIDENT EXTERNAL AFFAIRS

AFFILIATION: TRIGEN ENERGY CORPORATION WHITE PLAINS, NY

BODY:
July 19, 2001

Mr. Mark Hall Vice President External Affairs, Trigen Energy Corporation White Plains, NY

Mr. Chairman and members of the Committee, thank you for allowing me to testify before you today on Senate Bill 933 and other legislative proposals to remove barriers to combined heat and power (CHP) and other forms of distributed generation (DG). My name is Mark Hall, and I am the Vice President of External Affairs for Trigen Energy Corporation, based in White Plains, NY. Trigen owns and operates some of the most efficient power plants in the world. We accomplish this by deploying CHP, DG and leveraging other modern technologies in innovative ways. Trigen currently owns, operates or otherwise manages fifty-one plants located in twenty-two states, and the District of Columbia. Trigen is the proud recipient of many prestigious awards recognizing our innovation, leadership in the energy industry and commitment to environmental protection. This includes two awards from U.S agencies: the Energy Star Award from the U.S. EPA in recognition of our leadership in CHP projects and the Climate Protection Award from the U.S. EPA for corporate leadership in reducing greenhouse gas emissions. But more important than awards recognizing our environmental stewardship is the fact that we would not be selected to design, build own or operate on-site CHP projects for our customers if we were not able to provide substantial economic and reliability benefits in addition to outstanding environmental performance. The nearby University of Maryland College Park is an excellent example. Trigen and a partner were selected by the University to build and operate a new state-of-the-art CHP facility for the campus as well as to manage the on-site utilities while working with the campus staff to improve overall efficiency. The project is expected to save the University of Maryland system $6 million dollars per year while reducing regional nitrogen-oxide emissions by 9,800 tons per year and carbon dioxide emissions by 3.5 million tons over the 20 year life of the contract. We were the recipient of the 1999 Project Award from the National Council for Public-Private Partnerships because of our ability leverage technology in ways that were both economically and environmentally beneficial to all parties.

Despite these economic and environmental benefits, there are a variety of institutional and regulatory barriers that prevent CHP from achieving its full potential. These barriers inappropriately reduce the economic viability of CHP projects, slow their development and implementation and in some cases simply make them impossible to complete. S. 933 is an attempt to remove the interconnection and backup power barriers and allow Trigen and other companies to increase the beneficial application of CHP. Although S. 933 covers some of the issues, there are additional factors that must be addressed to fully remove the barriers. The cataloguing and systematic treatment of these barriers as suggested in S. 597 S 301 A & B and S. 388 S 112 are also critically important.

Mr. Chairman, Trigen's plants and employees are at work every day showing how efficient energy production is both good for business and good for the environment. By removing the barriers to utilizing CHP and other highly efficient DG, Congress can reward investors, benefit consumers, strengthen our economy and clean up our air.

The issues you have asked this panel to address are of critical importance to all of us. Energy sector competition is already upon us, with the States leading the way. The Federal government must rise to the task of addressing the barriers to competition that inherently lend themselves to national legislation, matters that cannot be responsibly dealt with in a piecemeal, State-by- State manner.

S. 933 is the result of many months of thoughtful work that reflects the benefit of numerous parties working together to arrive at consensus language that addresses the need for a uniform nationwide interconnect standard. S. 933 marks a critical step in efforts to improve the environment and electricity markets by encouraging the deployment of CHP and other DG. I would like to point out that HR 1945 is the companion bill to S. 933 from the House of Representatives. Trigen offers its full support of both.

In addition to addressing why there is a critical need for uniform nationwide interconnection standards, I would also like to highlight five other issues that must be addressed if we want to remove the most formidable barriers to deploying CHP and other highly efficient DG technologies. They are: Backup power as related to PURPA repeal, clarifying tax depreciation schedules, establishment of investment tax credits, rethinking new source review and establishing output-based standards. First, I will address interconnect standards and the immediate need for S. 933.

Interconnection

The National Energy Policy proposal recently released by the White House, like similar proposals of the last Administration, recognizes the economic and environmental benefits of CHP and other highly efficient DG systems. One formidable barrier to taking advantage of those benefits is the lack of uniform nationwide interconnection standards.

The current process for determining the appropriate technical requirements for the interconnection of new energy projects with the distribution or transmission system is often unnecessarily lengthy and expensive and the specific requirements can vary arbitrarily from state to state, utility to utility, site to site. Incumbent utilities that may not want to face competition may attempt to cloak anticompetitive behavior in the guise of technical disagreement over interconnection. We recognize that it is essential for interconnections to be safe and reliable, but interconnection standards can be both safe and reliable, and uniform. Bringing uniformity to interconnection through a uniform nationwide technical standard will reduce uncertainty, lower costs, and facilitate deployment of modern CHP technology, across the country. Interconnection language must be sufficiently broad to help all generators connect to the distribution and/or transmission grids. S. 933 provides for interconnections at both levels. The language does not pick winners and losers, but maximizes flexibility for determining whether the facility is connected to the transmission grid or the distribution grid. In addition, it is important that the language does not unnecessarily infringe upon States' rights to manage their respective distribution grids. The benefits of uniformity require that the standards apply to all states.

I think it is important to give you an example of the interconnection problem. Trigen has a great deal of experience interconnecting various sized generators with the distribution and transmission grid. We have done it literally dozens of times. Technically, it is a pretty straightforward task but in practice it can be a slow painful process that raises costs and delays projects that otherwise could be delivering important economic and environmental benefits. In 1998, Trigen approached a utility to request interconnection for a 703 kW generator to be installed in a downtown office building. The small system would supply the building's electric load and air conditioning. Yet, two years later, we were still negotiating with the utility over so-called "technical" issues. Months after receiving our initial request for interconnection, the utility asked that Trigen design a different, specialized interconnection. Trigen completed the new design at a significant additional cost. The utility rejected the design. In response, Trigen offered to use guidelines developed by Consolidated Edison in New York City, even though the ConEd guidelines were disproportionately burdensome and expensive given the very small size of the installation. The utility agreed, but after Trigen complied with these requirements, the utility imposed further "technical" restrictions on Trigen's ability to operate the facility. It took over two years to resolve this issue. The barrier related costs of completion were over $ 88,000.

One would strongly suspect that this was anti-competitive behavior masquerading as technical disagreement which successfully prevented the unit from operating for two years. This is but one of countless examples. In fact, DOE published a report in May of 2000 entitled Making Connections that memorialized this example and numerous others from across the country. S. 933 would address many of the interconnection barriers highlighted in that report. Passage of S. 933 will help manufacturers of CHP and DG technology achieve a plug and play economy of scale, lower costs and encourage investment in CHP and DG technology.

The Shortcomings of S. 597 Regarding Interconnect

Like S. 933, S. 597 recognizes the need for a uniform interconnect standard. However, S. 597 falls short of addressing the entire scope of that need. S. 597 calls only for a standard for interconnect to the distribution grid. Failure to address transmission interconnect would result in an enormous lost opportunity to ensure all the same benefits S. 597 seeks to achieve at the distribution level. Stream-lining interconnect at the transmission level will be one more encouragement to investing in larger scale DG like on-site CHP plants whose efficiencies can bring immediate large scale reductions in fuel consumption and emissions.

In addition, S. 597 does not include a provision addressing the right to back-up power at just and reasonable rates. Most CHP and DG assets require back-up power as insurance to the DG/CHP customer that they will have electricity in the event the DG/CHP asset has scheduled or unscheduled down time. Without a guaranty of affordable back-up power many DG/CHP projects will never get off the ground. I will address this issue in more detail below.

Finally, S. 597 includes limiting language that the DG asset must be designed to serve retail customers "at or near the point of consumption". S. 933 does not include any such limitation. If we want to encourage the deployment of highly efficient CHP and DG assets we should not place any limitation on what customers are served or where it can be located in order to take advantage of uniformity.

Backup Power and the Prospective Repeal of PURPA's "Must-Sell" Provision

Hand-in-glove with the issue of interconnection standards is the availability of reasonably-priced back-up power. Historically, back-up power was guaranteed at just and reasonable rates to facilities that met either the Qualifying Facility or Small Power Production Facility definitions under PURPA. However, as technology and markets have evolved, the need for back-up power at rates that are just, reasonable and not unduly discriminatory is important to a wide-range of projects that might not meet these historic definitions, regardless of whether the project is interconnected to the transmission or distribution grid. S. 933 remains respectful of state authority by allowing States to determine the just and reasonable rate for back-up power at the distribution level. The Bill also ensures that until there are open markets where a facility can competitively purchase backup power, the local utility must provide such backup power at nondiscriminatory rates.

CHP and other DG systems rely on the ability to purchase backup power from the grid in the event that they temporarily fail to operate or must shut down for maintenance. Under current PURPA laws the local utility "must sell" backup power to qualified stand alone CHP facilities. Many proposed restructuring bills would repeal both the "must buy" and the "must sell" requirements of Section 210 of PURPA. The "Right to Back-up Power" provision of S. 933 is a safety measure that will ensure back-up power at just and reasonable rates if the "must sell" provision of PURPA is repealed and there is no open access to purchase of electricity in a given state. Elimination of PURPA's "must sell" requirement without the protection of the right to back-up power will leave new entrants and existing DG at the mercy of the local utility, subject to discriminatory pricing or outright denial of back-up power.

Tax depreciation schedules

The current tax code, based on an somewhat obsolete view of the energy industry, currently does not allow depreciation of CHP and DG technologies in ways that reflect those assets physical and economic lives. This inappropriate treatment can discourage investments in CHP and DG technology. For example, the IRS allows a gas turbine located inside a building for on-site generation use to be depreciated over a 39-year period while the same gas turbine used for transportation (e.g., on an airplane) depreciates in one quarter of the time. The moving parts of the turbine used for electricity and heating may be replaced as many as five times while the owner continues to depreciate the original investment. Shortening the time over which this equipment depreciates would remove an impediment to investment in what is otherwise an efficient and environmentally beneficial technology.

New and small turbines have different physical properties and will generally operate under quite different conditions than large turbine units employed by traditional electric utilities and, consequently, will have different service lives. Further, the competitive marketplace will force energy suppliers to replace or "upgrade" standing equipment before it fails, since installation of more efficient technology offers lower costs to customers and the opportunity to hold or capture market share for competitive energy suppliers. We expect that energy generation equipment will come and go in the marketplace in a manner that strongly resembles that of modern computers - assets which outlive their economic lives long before they cease to work properly.

Congress should direct the Internal Revenue Service (IRS) to set a depreciation schedule of seven (7) years for industrial and utility facilities and ten (10) years on Building CHP (BCHP) assets, which reflects the true technical and economic life of most systems. I have attached to this testimony, recommended modifications to the Internal Revenue Code from the US Combined Heat and Power Association (Attachment A). Trigen is a member of the USCHPA and supports all of its recommendations.

Combined Heat and Power Investment Tax Credit

Tax credits are typically offered by the Federal government to obtain public benefits by prompting private parties to make capital investments that they would not so readily make otherwise or to overcome other short-term barriers to otherwise feasible activities. As such, an investment tax credit (ITC) is a good short-term mechanism to promote CHP systems, which offer very significant public and private economic and environmental benefits, but can often be more difficult for the private sector to deploy than electric-only projects because of the complexity inherent in assembling a "thermal load" or set of heating/cooling customers.

Congress should direct the IRS to provide a ten (10) percent ITC for met thermal energy distribution systems at district energy CHP faciliteis. I have attached to this testimony, recommended modifications to the Internal Revenue Code form the US Combined Heat and Power Association (Attachment A). Trigen supports all of its recommendations.

New Source Review

The new source permitting program known as New Source Review (NSR) was developed over 20 years ago to reduce air pollutant emissions. At the time the focus was on reducing smokestack emissions and NSR focuses primarily on requirements for end-of- pipe, add-on control technologies. Add-on controls reduce emissions but add cost and reduce efficiency.

Over the last 20 years, we have learned that a much better approach to pollution control is to entirely avoid the generation of pollution through lower emitting processes and reduce their impact through increased efficiency. Pollution prevention (P2) and increased efficiency reduce emissions while also reducing capital and operating costs. They result in processes that are cleaner and cheaper with lower demand on all natural resources. This is clearly the direction that we need to move in order to achieve a vital economy and a healthy environment and CHP is perhaps the best example of this opportunity.

Unfortunately, NSR does not give any credit for efficiency and gives little or no credit for pollution prevention. It is constantly driving projects away from these positive approaches and back to the old sidetrack of add-on controls. It discourages the application of existing P2 technologies and the development of new technologies. U.S. companies have learned that they should not invest in the development of cleaner and higher efficiency technologies because they will not be able to permit them. This is a multidimensional loss to the U.S. economy. In contrast, our foreign competitors have made great strides in these areas, which are reflected in their high efficiency use of energy.

As an example, several of our recent projects have been based on a particular small gas turbine generator. As an electric generator only, the turbine is less than 30 percent efficient. However, our CHP applications using that same piece of equipment are anywhere from 80 to over 90 percent efficient. Put another way, we provide more than three times as much energy to the customer from the system for the same amount of emissions and energy input.

It is only common sense that our regulatory system should recognize this energy and environmental benefit. But it doesn't. In the eyes of NSR, there is no difference between the two systems. Since NSR is a cost-based system, it is requiring us to duplicate capital investment to use add-on controls where we have already provided a reduction through efficiency. In many cases, the project "won't pencil" if we have to pay twice, and a beneficial project is cancelled.

This fundamental flaw of NSR is only one of several ways in which the regulation has outlived its usefulness. The program relies on a variety of highly technical standards to determine which new or existing units will be required to apply emission controls. Over the years, these standards have become more and more arcane and contentious. The very high cost and uncertainty involved in the application of NSR to both new and existing units has created a huge disincentive for operators to maintain and improve the performance of these units. By holding out for the maximum possible improvement at all times, the program has discouraged even the normal improvement that should happen without regulation. By excluding the effects of pollution prevention and efficiency, it has excluded the best possible solutions from consideration and left us with proliferating lawsuits as the only result.

Because CHP, by definition, produces two types of energy output (steam & electricity) from one fuel input, its treatment under NSR is especially difficult. The system sometimes tries to force us to combine our facilities with those of our clients in ways that are commercially impossible. In other cases it deprives us of credit for emission reductions that are legally verifiable and creditable.

Output-based regulation, which relates the emissions to the useful energy produced is another regulatory concept that would help to address these problems. There has been growing acceptance of this approach as a way to send the proper signals through environmental regulation. Unfortunately, it seems to be difficult to integrate this approach into the structure of NSR.

We have been working with the EPA for more than three years to find appropriate ways to achieve the universally recognized benefits of CHP within the NSR structure. I am sorry to report that our progress to date has been limited. In large part this is due to the fundamental structure of the program. In the end, we are forced to conclude that, at least for the generation of heat and power, the NSR program is a grandfathered regulation that has outlived its usefulness and needs to be replaced with a more modern and efficient regulatory structure. We believe that a properly designed cap and trade program that provides guaranteed emission reductions over the entire sector would provide better environmental results and encourage new, more efficient technology. I have attached a copy of a multi-pollutant strategy (Attachment B) that Trigen and four other energy companies have developed as a substitute for NSR as it applies to heat and power generation.

Output-Based Standards

Currently, efficiency is measured by an input-based standard that measures fuel consumption as opposed to energy output. Under this approach, the efficiency of CHP is not recognized. By way of example, for every one unit of fuel consumed by a CHP plant two units of energy are produced - steam and electricity. CHP is twice to three times more efficient than a typical central generation plant that only produces one unit of energy for every one unit of fuel consumed because it is not capturing the heat off the combustion process.

The establishment of output-based standards would allow facilities to count their fuel to end use energy efficiency toward their environmental compliance requirements. Output-based standards encourage efficient and inherently cleaner plants. Trigen has been an active participant in numerous venues established to develop output-based standards. Trigen seeks establishment of progressive regulations that replace BACT and LAER with a cap and trade program coupled with a universal allowance allocation of pounds of pollution per megawatt hour of electricity produced and pounds per megawatt hour of thermal energy produced.

Conclusion

Given the inevitability of competition in the electricity market, and both national and global trends that will guide the future of energy production in this country, I believe that emerging technologies are serving and will serve an indispensable purpose in meeting goals of energy efficiency and environmental demands. I urge this committee to pass S. 933 and to take a proactive stance on addressing the other concerns I have raised here today. We would also like to reiterate our support for S 301 A & B of S. 597 and S 112 of S. 388. I thank the committee for the opportunity to appear before you. Thank you, Mr. Chairman.



LOAD-DATE: July 24, 2001